SMB Training Blog

The Failure Rate of a Proprietary Trader

I remember the discussion like it was yesterday. It was in our former 8×10 makeshift training room/office/conference room/lounge with the first trader who ever failed at SMB Capital. JJ announced he was leaving to take a six-figure job at a financial services company in NYC. But let’s be honest. JJ was leaving because he was not making money as a trader. And while he put on an off-to-better-things face, JJ didn’t want to leave.

I didn’t sleep well for a month. I felt like his failure was my failure. And I’m sure JJ didn’t sleep well for two months prior to our exit conversation. I still miss having him as a part of our firm. JJ was the most likable guy on our trading desk. But these scenes happen every quarter at even the best of proprietary trading desks, including the big banks.

My manuscript is done and in the hands of Wiley Publishing for One Good Trade: Inside the Highly Competitive World of Proprietary Trading and interestingly enough two chapters were devoted to why traders fail. The failure rate is too high in our industry. There, I said it! And I wrote extensively about this in my book. It is so for a variety of reasons including:

1) some are not qualified
2) most are poorly trained
3) many do not have a passion for trading and cannot sustain the energy to improve daily
4) the learning curve is too difficult
5) they are not good enough

I agree with Charles Kirk from the awesome The Kirk Report that you can become a solid trader if you are willing to put in the time. But many believe their passion is trading, then sit on a trading desk, see the work required to succeed, and are not willing to do the work.

The market requires that you become an elite performer. Most people can “punch the clock” at their jobs, do average work, and be appreciated by their employers. Heck, you might even get promoted. Try this as a trader and the market will swallow you like a shark does squid. The best trader on our desk grinds it out daily like a steam pipe fitter.

When someone interviews for our desk and asks how long it will take for them to become consistently profitable I answer directly. It depends on the person. But if you’re not prepared to work and struggle (you don’t learn if you don’t struggle) for 6-8 months, honing your craft before you sustain profitability, then I suggest other work. Too many enter our profession without a realistic time frame for becoming profitable.

There is a learning curve in our arena, no one is beyond it, and trading is the ultimate challenge. We recruit many Division I athletes for our desk. And I share as a former athlete, “Even considering your past, you have no idea what it is like to be competitive until you trade professionally.”

Numbers abound about what the failure rate is. Some say 95 percent. Others claim 80. We had a college student fly across the country to visit us who was writing his college thesis on this very subject. He came in at 90 percent. At a big bank the whisper number is 55 percent. I had dinner last night with a close friend that relayed the head trader at a Tier I investment house was bemoaning the worst part of his job: letting failed traders go.

These numbers above include far too many people who should have never tried. There are too many bad-acting firms who promise early riches preying on the monetarily ambitious, who have no passion for trading. These noobs are merely hunting for the next big game in our economy. And these pikers get included in the failure data. The market spits out these miscasts. And so while the failure rate may be high this rate is not relevant to those who deserve an opportunity.

Most excellent prop firms screen their new traders carefully. At our firm 95 percent of all who apply never receive an interview. And let me say that there are some who make it inside our doors who, after we’ve learned more about them, never had a chance to become a profitable trader. For even those who are accepted into our training program there will be those who fail. Some classes have 5/6 still trading, others 3/9 (though two quit early and one was fired the first week). The best we can offer to qualified candidates who receive an invitation to train with us is to give them the best chance to succeed. This is the most we can promise!

It is the obligation of a proprietary trading firm to offer the very best training possible for new traders. This simply means offering opportunities for traders to develop the intricate skills that will determine their success. The markets have changed substantially since when I began. The old school sit next to a successful trader and learn through osmosis teachings that are outdated and must be replaced by modern training (I will write more about this for SFO Magazine in June). I have the privilege of receiving dozens of emails daily from new traders who detail the training they are receiving from other firms. Most talk of their struggles. Almost always their training is substandard. This is an unfortunately huge factor in why so many fail.

A firm must allow you to lose money if you are doing all the things necessary to succeed and improving. Down 50k but working hard and getting better every day is not a reason to cut a trader. Not doing the work demanded by the market and slightly positive or worse, then the firm owes it to all the other traders on the desk to get rid of that underperformer. These noobs hurt morale, drain firm resources, and do not deserve the privilege of trading professionally.

To become great at anything requires deliberate practice. If you want to get better at a consolidation play you must practice this trade hundreds of times until you have developed the skills to automatically trade this play in real time. How many three-pointers do you think Kobe shoots everyday? Training that does not stress deep practice is unsatisfactory.

For the developing trader just learning simple charting set ups is not enough. This is the great myth held by too many who have never traded real money live. How hard could this trading be? All you have to do is get long when AMZN hits 116 and kick it out at 130. This has not been my experience with the market.

And it is great that you have learned a new technical set up. Now, how do you trade the fifteen subsets of that trade which the market will demand you learn? Trading is not about learning a simple charting set up and then executing. If you do not agree then go and try it. One day you might crush it and leave the market a self-delusional future star. And then the next few trading sessions you will get stopped out (assuming you honor a daily stop out) and lose much more than that day you crushed it. Such thoughts are like the golfer (hacker?) who drains a fifty-foot put and then believes he is a great putter.

If trading were that simple there would be no need for discretionary trading. All trading would be automated. And we all know that automated trading systems fail at a higher rate than discretionary traders. It is about the subsets, the nuances, mastering the different market variables that separates the veteran profitable trader from the noob looking to cash his first paycheck. Too many new traders gravitate towards the simple, which is an unappetizing recipe for failure.

Scalping after just learning how to Read the Tape is also insufficient. If you’re at a firm and all they teach is to follow the order flow I offer this advice: RUN! Run from that firm as fast and as far as you can. Also, trading without a grasp of intraday fundamentals will be penalized by Mother Market. Look, you must learn technical analysis, how to Read the Tape, and understand intraday fundamentals to succeed as an intraday trader. All of this takes concerted practice over time until you develop the skills necessary to consistently take money out of the market.

Trading is a performance-based business. After the Close yesterday Steve and I reviewed our trading in QCOM on the Open and AMZN in the After Hours. I have traded my own money for twelve years. I missed a QCOM short for size and an easy multiple point down move by a millisecond yesterday. This is not acceptable (though I eventually put together a decent day). It was my fault for missing that trade.

Too many new traders miss these trades and never obsess about not missing the next one. It is always someone else’s fault. If only I sat next to that trader. If I just had a better charting package. If only that girl I was seeing wasn’t so needy. That is all bull $hit. You determine your destiny as a trader. It is up to you to perform. I didn’t miss that trade in QCOM because I was patrolling our risk monitor (which I was) watching the work of a new trader. I missed that trade because I missed that trade! And too few ever develop this mentality to survive as a professional trader.

A group of college students from Texas A&M visited us recently and I will share what we discussed. I graduated from law school with a safe job awaiting. I just couldn’t do it. To me I felt like I would be selling out. If you have a passion for something, then go learn if you possess a talent for it as well. But have a Plan B. You will become great at that which you have a passion and engage in deliberate practice for and rewards your talents. This could very well be trading. But maybe not.

To me trading is the greatest job in the world. Every day is new. I sit around bright, talented, ambitious, well-educated, market followers quick to crack a joke and smile. If you become successful your upside is unlimited. When I used to just trade, Steve and I vacationed and went wherever we wanted. There were very few boundaries to our world. Trading is stimulating. It requires you to find the best inside of you. The best decision I ever made was shunning a career not a fit for me to trade.

If trading is your passion, you possess the ability to survive the learning curve, are willing to engage in deliberate practice to develop trading skills, have a history of success, and a Plan B, then you should consider trading. And you need not be an Ivy League graduate to become a great trader. And the market does not care if you have family connections while executing trades. Nor must you work at a big bank or live in NYC. But please find a firm that will provide you with the tools and education necessary to succeed. And understand that those who make it have developed their trading skills through deliberate practice, work that many are unwilling to do.

If you have taken this path and wish to ask me a trading question, please feel free to reach out to me.